Finance – Expectation of policy rate cut ups forecasts

With interest now poised to head down, we have factored lower interest into our forecasts. This lifts our 2025-2026 forecasts by 2-6% and TP by 11-29% and leads to an upgrade of TIDLOR to Outperform, and it is now our sector top pick rather than MTC, as TIDLOR’s valuation is now lower and less expensive than MTC. At the same time, share prices have partly priced in the potential for lower cost of funds from rate cuts. For S-T trading, we recommend buy on weakness.

Factoring in potential policy rate cuts. Following the 50 bps cut in the Fed funds rate by the FOMC, INVX’s economist expects the BoT to cut policy rate by 50 bps in 4Q24 and 50 bps in 1H25. We thus expect banks will cut lending interest rates (MLR) by 25 bps in 4Q24 and another 25 bps in 1H25, which will lower finance company borrowing cost to a similar extent. As the majority of consumer finance companies obtain funding via L-T borrowings, cost reductions will phase in for two years after rates are cut. We raise NIM by 1-3 bps in 2024F, 8-19 bps in 2025F and 7-23 bps in 2026F. TIDLOR is expected to see the greatest improvement in NIM in 2025 and SAWAD in 2026 on a coincidence in higher loan yield from a hike in loan pricing and lower cost of funds. We expect AEONTS and KTC to see lower NIM in 2025 as a result of: 1) the BoT’s persistent debt (PD) measures and 2) cash back of 0.5% interest on credit card loans in 1H25 and 0.25% in 2H25 for debtors who make the 8% minimum repayment.

Lingering asset quality issue. Although the worst has passed, the consumer finance sector faces a lingering asset quality issue. In 4Q24, asset quality should benefit from the government’s cash handout of Bt10,000 each to 14.5mn holders of state welfare cards and the disabled, starting on Sep 25. However, this money is expected to be used to offset the damage from the widespread flooding (mainly in the northern part of Thailand). Used car prices are still at risk as lenders speed up repossessions, with the used car price index falling 7% MoM and 15% YoY in July. Consumer finance companies further tightened lending by lowering LTV in 1H24. We expect MTC, TIDLOR and SAWAD to see an HoH rise in credit cost in 2H24 as used car prices are expected to fall further. We expect KTC and AEONTS to see an HoH easing in credit cost in 2H24 on the positive impact from the cash handout and the front-loaded impact from a hike in minimum credit card repayment to 8% in 1H24 from 5%.

Slowing loan growth outlook. We expect loan growth to slow down in 2024-2026 on: 1) further tightening in lending, 2) accelerated write-offs, 3) an unfavorable environment for bond issuance, 3) a hike in minimum credit card repayment to 8% from 5% and 4) the implementation of the Debt Service Ratio in 2025. For title loans, we expect sustainable loan growth to gear down to 10-18% over 2024-2026 from 20-30% over 2019-2023.

Raise 2025F earnings = Strong growth in 2025 but still flattish in 2H24. We raise our earnings forecasts by 2-4% for 2025 and 4-6% for 2026. In 2025, we now expect MTC to have the strongest earnings growth at 27%, followed by TIDLOR at 21% and SAWAD at 12% (+3% for EPS) but for only modest growth at KTC and AEONTS at 5%. In 2H24, we expect earnings to be essentially flat QoQ and YoY, with QoQ stable loan growth, a QoQ fall in NIM from rising cost of funds and continued high credit cost.

Raise TP with TIDLOR as new sector top pick. We raise the TPs of consumer finance companies (with the exception of AEONTS, pending release of 2QFY24 results in October) by 11-29% to reflect higher sustainable ROE from lower cost of funds. This leads us to upgrade TIDLOR to Outperform and put it as the top pick, switching from MTC, as TIDLOR’s valuation is now lower and less expensive than MTC’s. We keep Outperform on MTC and AEONTS as well as Underperform on KTC (rich valuation relative to growth potential) and SAWAD (higher risk than peers on ESG from the DSI investigation, asset quality from motorcycle HP and a funding constraint).

Key risks: 1) Asset quality risk from an uneven economic recovery, 2) credit cost risk from falling used vehicle prices, 3) rising competition from banks and upcoming virtual banks, and 4) ESG risk from market conduct and regulatory risk.